The Math Says Middlemen Own Online Advertising's Future

The mainstay of the US $14 billion online-advertising industry—the ”sponsored links” that appear alongside Google and Yahoo search results—contains an inherent inefficiency that is destined to give birth to third-party search-term auctioneers and fuel the growth of so-called mediators, like the Web sites Shopzilla and Shopping.com.

This unorthodox conclusion emerges from a new study by engineers at the University of California, Los Angeles, in which a rigorous subset of mathematical laws—first formulated by John Nash (the subject of the 2001 film A Beautiful Mind)—was applied to the volatile pay-per-click advertising marketplace. Specifically, Sudhir Kumar Singh and his coauthors at UCLA’s department of electrical engineering employed the game-theory concept of Nash equilibrium, in which one’s strategy continually shifts because one’s opponent’s strategy is continually shifting.